Capital Gains Tax on Inherited Property: Calculation, Tax Rates and Exemptions

In summary

Capital gains tax on inherited property generally becomes applicable when the legal heir sells the property, rather than when the property is inherited.

The tax calculation follows specific rules:

• Cost of acquisition: The property's cost to the previous owner is generally treated as the cost for the legal heir.
• Holding period: The previous owner's holding period is included when determining whether the gain is short-term or long-term.
• Long-term capital gains: Property held for more than 24 months is generally treated as a long-term capital asset.
• Tax rate: Long-term capital gains are generally taxed at 12.5% without indexation for transfers on or after 23 July 2024.
• Indexation option: Resident individuals and Hindu Undivided Families (HUFs) may receive a comparison benefit for qualifying land or buildings acquired before 23 July 2024. The tax calculated at 20% with indexation is compared with the tax at 12.5% without indexation, and the excess tax under the latter calculation is ignored.

Eligible taxpayers may also claim exemptions by reinvesting capital gains in specified assets, subject to the applicable conditions.

The classification depends on the total holding period, including the period for which the previous owner held the property.

For land and buildings, the general holding-period threshold is 24 months.

For example, if a parent purchased a property in 2008 and the child inherited it in 2022 before selling it in 2026, the holding period is calculated from the parent's acquisition date. The property would generally qualify as a long-term capital asset.

The date of inheritance alone does not determine whether the gain is short-term or long-term.

Eligible taxpayers may reduce or eliminate capital gains tax by reinvesting the gains in specified assets under the applicable provisions of the Income-tax Act, 2025.

The availability of an exemption depends on the type of property sold, the nature of the gain, the taxpayer's eligibility and the time within which the new investment is made.

1. Reinvest in another residential property

Under Section 82 of the Income-tax Act, 2025, an individual or HUF may claim an exemption on eligible long-term capital gains from the sale of a residential house by purchasing or constructing another residential house in India.

The applicable timelines are:

• Purchase: Within one year before or two years after the date of sale.
• Construction: Within three years after the date of sale.

The exemption is generally limited to the capital gain or the eligible investment in the new house, whichever is lower, subject to the statutory cap and conditions.

If the capital gain does not exceed Rs. 2 crore, the taxpayer may exercise the one-time option to invest in two residential houses in India, subject to the applicable rules.

2. Invest in specified capital gains bonds

Section 85 of the Income-tax Act, 2025, provides an exemption for eligible long-term capital gains arising from the sale of land or buildings when the gains are invested in specified bonds.

The investment must generally be made within six months from the date of transfer.

The maximum eligible investment is Rs. 50 lakh, subject to the applicable annual and transaction-related limits.

The specified bonds include eligible bonds issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC) and other notified issuers.

The bonds are subject to a five-year holding requirement. Selling, transferring or converting them into money within the prescribed period may result in withdrawal of the exemption.

3. Use the Capital Gains Account Scheme

If the taxpayer cannot use the capital gain to purchase or construct a new residential property before filing the income-tax return, the unutilised amount may be deposited in the Capital Gains Account Scheme (CGAS), subject to the applicable conditions.

The deposit must be made before filing the return and no later than the applicable due date for filing the return.

The amount must subsequently be used within the prescribed period for the eligible purchase or construction. Any amount left unutilised after the permitted period may become taxable.

The CGAS is a mechanism for retaining eligibility for an exemption; depositing the money alone does not permanently exempt the capital gain.

The stamp duty value is the value adopted or assessed by the relevant state authority for calculating stamp duty on a property transaction.

Under Section 78 of the Income-tax Act, 2025, if the actual sale consideration is lower than the stamp duty value, the stamp duty value may be treated as the deemed sale consideration for calculating capital gains.

However, if the stamp duty value does not exceed 110% of the actual sale consideration, the actual consideration is generally accepted.

For example, suppose an inherited property is sold for Rs. 50 lakh and its stamp duty value is Rs. 54 lakh. Since the stamp duty value does not exceed 110% of the actual sale consideration, the actual sale price is generally used for the capital gains calculation.

If the difference exceeds the permitted tolerance, the stamp duty value may be considered instead. A taxpayer who believes that the stamp duty value is higher than the property's fair market value may explore the prescribed valuation procedure.

Keeping the relevant ownership, acquisition and sale documents can help establish the legal heir's title and support the capital gains calculation.

Important documents may include:

• Will or succession documents: A registered will, probate, letters of administration, legal heir certificate or other relevant succession documents, depending on the circumstances.
• Previous owner's purchase documents: Original sale deed, purchase agreement or other documents showing the previous owner's acquisition cost and date.
• Property ownership records: Title deed, mutation records and relevant property registration documents.
• Improvement expense records: Invoices and receipts for eligible capital improvements made by the previous owner or legal heir.
• Sale documents: Sale deed, agreement to sell and proof of sale consideration.
• Transfer expense records: Brokerage, legal fees and other eligible expenses directly connected with the sale.
• Tax records: Relevant income-tax returns and capital gains computation documents.

The exact documents required may differ depending on the property's ownership history, the number of legal heirs and the state-specific registration process.

Selling inherited property in India may result in capital gains tax, even though receiving the property through inheritance does not generally trigger capital gains tax. The calculation uses the previous owner's acquisition cost and holding period, along with eligible improvement and transfer expenses. For long-term gains on property sold on or after 23 July 2024, the general tax rate is 12.5% without indexation, with a comparison-based relief available to eligible resident individuals and HUFs for qualifying property acquired before that date. Reinvestment exemptions may also help reduce the tax liability, subject to the prescribed conditions and timelines.